Kenneth Cole Productions, Inc. reported a net loss of $17.2 million, or 94 cents a share, in the first quarter. The company noted that included in its results were $16.0 million in
one-time charges, related primarily to lease termination payments and
severance tied to the acceleration of store closings.
The year-over-year decline in earnings was also due to a reduction in gross margin associated with
markdowns and liquidation required to manage inventories.
Total one-time charges were partially offset by $3.5 million
of deferred rent income associated with the store closings, resulting
in net charges of $12.5 million. In the 2010 first quarter, it earned $1.8 million, or 10 cents a share.
Net revenues in the first quarter grew 7.3 percent to $117.5 million versus $109.5 million in the first quarter last year. The increase was driven by stronger Wholesale sales offset partially by a decline in Consumer Direct sales due to the closing of net 11 stores year-over-year and a 2.7 percent comparable stores sales decline.
Wholesale revenues increased by 19.3 percent to $74.5 million from $62.4 million in the year ago period, primarily driven by an increase in men’s footwear and Reaction men’s sportswear.
Consumer Direct revenues declined by 10.2 percent to $33.2 million versus the year-ago level of $37.0 million. Licensing revenues in the first quarter declined to $9.8 million versus $10.1 million in the year-ago quarter. This decline was primarily attributable to the discontinuation of licensing royalties for Le Tigre. Otherwise licensing revenues were up 6.5 percent.
Gross margin declined 610 basis points to 35.5 percent versus 41.6 percent in the first quarter last year. This anticipated decline was driven by increased promotional and clearance activity associated primarily with the accelerated store closings, rising costs and a shift in mix toward Wholesale sales.
SG&A, as a percentage of net revenues, excluding one-time charges in the first quarter, improved 130 basis points to 39.4 percent from 40.7 percent in the year ago period. The improvement was the result of an ongoing focus on cost efficiencies, leverage in Wholesale, and a shift in sales mix towards Wholesale revenues during the quarter.
The company’s balance sheet remained strong at March 31, 2011 with $54 million in cash and no long-term debt. The reduction in cash versus the prior year level of $66 million was primarily a result of the lease termination payments in the amount of $14.7 million and an increase in working capital requirements to run the men’s Reaction sportswear business.
Total inventory was $42.4 million versus the prior year’s level of $35.2 million. This increase reflects the additional inventory required to support the new Men’s Reaction sportswear business. In addition, despite progress in clearing units, total inventory at the close of the first quarter remained elevated due to excess inventory in retail. Notwithstanding the year-over-year increase, inventory was current.
Kenneth Cole, chairman and interim chief executive officer, commented, “While were obviously not pleased with these results we are dedicated to improving every aspect of our business. While it’s been necessary to focus on reducing costs, streamlining, and on efficiency building the past few years, we are now also focused on repositioning our business for sustainable growth across all sectors. We also intend to reclaim the leadership position of the brand, not just its social voice, but also its fashion and its product
Second Quarter Guidance
The company expects to report second quarter earnings per share on a GAAP basis of $0.02 – $0.04 on revenues of $105 to $110 million. While the company expects to remain in a clearance and liquidation mode in the second quarter, it expects retail inventories to return to more appropriate levels by the end of the quarter.
